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The War on Savers

Independent financial planners have every reason to feel anxious about the current political environment. From almost every angle, it seems that someone is out to penalize them and their clients.

Let’s start with the Federal Reserve’s policies of keeping interest rates artificially low. These policies represent a massive transfer of wealth from savers to debtors. To cushion the blow for the millions of Americans who lived beyond their means over the past decade, the Fed continues to penalize those Americans who kept to a budget and set money aside for the future. The cost of these subsidies is in the billions of dollars and puts the retirement security for millions of prudent Americans unfairly in jeopardy. Financial planners who helped these investors structure their savings take a particular hit, especially if they moved away from transaction-based fees to better align their interests with their clients. Artificially low returns on client portfolios mean artificially low compensation for advisors paid on assets under management.

The story will get worse next year when the new 3.8% surcharge on dividends and capital gains to be used to fund the new health-care system kicks in. There’s no compelling logic for savers and investors to foot the bill for the country’s health care. They’re just the banks to the government’s Willie Sutton. If politicians want to purchase health coverage that the country can’t afford, they must appropriate the funds from wherever the money can be found. Savers are made to pick up the tab because no one else can. It may well be the right thing to do, but at a minimum, we should be thanking savers for their funding of this program, rather than chiding them for their success and calling them “fat cats.” Again, advisors paid on assets under management specifically subsidize these health-care costs in the form of lower revenues.

The federal government is not the only entity that wants access to savers’ money. Charities and municipalities do, too. These parties have sufficient political clout that they managed to get municipal-bond interest and charitable donations left off the table in the first incarnation of the Buffett Rule proposed this spring. If the purpose of this latest surcharge on savers is truly to raise more money for the federal government, it’s stunning that two such powerful tools as municipal bonds and charitable donations are left in the hands of the well-to-do. Under this scenario, the idle rich can avoid the brunt of these new punitive taxes simply by shifting assets to muni bonds and by strategically timing charitable contributions.

As such, there are only two parties likely to be ensnared by the Buffett Rule. First, hedge fund and private equity managers who have too long been allowed to miscategorize their carried interest as capital appreciation rather than income, an anomaly that could be cleaned up in far simpler methods than the Buffett Rule. Second, entrepreneurs and small-business people who persevere for years at belowmarket wages before enjoying a one-time financial reward from the sale of their business. The latter category, of course, includes many independent financial planners who set up their own practices so that they could serve their clients without being pressured to sell high-cost, in-house products. These advisors took a significant financial hit to reposition their practices in a way that they believed would allow them to better serve their clients. Ironically, they now find themselves squarely in the middle of a political fight that positions them as the ones not doing their “fair share.”

Add in the fact that higher investment taxes in general will make independent advisors’ fees, which are paid out of pretax dollars, more expensive than the services of advisors paid through less-transparent fees embedded in financial products, and it’s easy to see why many independent financial planners’ heads are swimming. How did we get to a point where debtors are subsidized and savers penalized? A point where small businesses and planning practices that align their interests with clients take the brunt of new taxation done in the name of fairness? It’s as if no good deed will go unpunished.

Now more than ever, Americans need the discipline and counsel of independent financial advisors. We should bolster, rather than penalize, the profession. We need good advisors to build the nest eggs that will supply the financial capital that retirees must turn to as the value of their human capital diminishes. Saving for the future must be an expectation of all Americans. We won’t get there by further taxing savings and by deriding those who have saved successfully. The politics of envy give those who, like our government, spend beyond their means an easy excuse not to alter their behavior. Appeasing our too many debtors at the expense of our too few savers may make for successful election-year politics, but it forges a morally corrupt long-term policy.